Insights 
VT 
Barclays has revised its forecast regarding the European Central Bank (ECB) rate cuts. Initially, two rate cuts were expected for the year – one in September and another in December.
Now, Barclays expects only one rate cut, scheduled for December. This adjustment follows observations of US tariffs on EU imports and concerns about medium-term inflation.
Terminal Rate Forecast Update
The previous terminal rate forecast was set at 1.50%, based on assumptions about tariffs and inflation risks. Despite the US tariffs aligning with this assumption, Barclays has removed the prediction for a September rate cut.
The decision partly stems from ECB President Christine Lagarde’s press conference and information from ECB sources. These suggest the status quo will be maintained in September regarding policy rates.
We are changing our view on the European Central Bank’s next move. A rate cut in September now looks unlikely, with a pause being the new baseline. This shift comes directly after recent central bank communications, which were less supportive of immediate easing.
Implications for Trading Strategies
This outlook should provide a strong floor for the euro in the coming weeks. With the EUR/USD exchange rate already firming above 1.09, options strategies that bet on the euro holding its ground or climbing higher seem sensible. The market is now adjusting to the idea that the interest rate difference between Europe and the US might not shrink as fast as we thought earlier this year.
For interest rate traders, this means short-term rate expectations for September must be adjusted higher. The latest flash estimate for Eurozone inflation in June came in at a stubborn 2.5%, which gives the ECB a clear reason to wait before cutting again. This suggests that positions betting on a September rate cut, reflected in Euribor futures, are now fighting the central bank’s clear message.
This is a headwind for European equities, which now face the dual pressure of higher interest rates for longer and slowing global trade. The new 15% US tariffs on key EU exports, which were a focus earlier this month, will start to impact corporate earnings. Traders should consider protective put options on major indices like the DAX or Euro Stoxx 50 to hedge against potential weakness in August and September.
The clash between slowing growth and a hesitant central bank is a recipe for higher market volatility. This situation reminds us of past cycles, like in 2022, where markets had to scramble to re-price policy after getting ahead of the ECB’s thinking. Positioning for a rise in the VSTOXX index, Europe’s main volatility gauge, could be a prudent move through the quiet month of August.
